Global Economics

Google Hits a Chinese Wall

Upstaged by Baidu.com, it's forging ties with local Web players to expand its reach

Google is having a hard time getting its China strategy to click. Baidu.com Inc., (BIDU) based in Beijing, owns more than 58% of China's Internet search market, compared with less than 25% for Google, according to Analysys International, a research firm based in the Chinese capital.

What's held the U.S. search engine back? Baidu had a big head start, which it used to build its brand. To charge up its operation in China, Google hired Kai-Fu Lee, a seasoned executive from Microsoft Corp. (MSFT) But then it had to go through a messy trial brought by Microsoft in order to keep Lee. Google has not acquired all the licenses it needs to run a full-service operation in China. And senior management at Google headquarters has questioned the compromises it must make to satisfy the censors in Beijing.

Still, Google Inc. (GOOG) is not ready to be upstaged by any rival. In late August, Lee announced that the company wants to shake things up. On Aug. 20 came the news that Google was forming a revenue-sharing partnership with Tianya, a Chinese social-networking site. The company already has similar alliances with portals run by SINA Corp. and Tom Online Inc. (TOMO), the China-focused Internet operation of Hong Kong billionaire Li Ka-shing. "You'll see continued collaboration with local companies," writes Lee in an e-mail exchange with BusinessWeek.

With these deals, Google is cobbling together an anti-Baidu alliance, explains Richard Ji, a Hong Kong-based Internet analyst with Morgan Stanley (MS): "They are trying to isolate Baidu and prevent it from partnering with other major Web sites." The alliances give Google the chance to offer more features, and offer new support in its battles to extract better operating terms from Beijing.

Recent data show a modest bump up in Google's China traffic. But if the Mountain View (Calif.) company really wants to dominate the No. 2 Internet market, it needs to think big. Buying Baidu outright seems out of the question, even though Google was once a minority investor in its rival. With Baidu now a major disseminator of news on the mainland, there's no way China's leadership would give such a deal a green light.

What other options does Google have, then? Edward Yu, CEO of Analysys, has an idea: "Team up with state-owned media" such as Xinhua News Agency or The People's Daily. "These relationships would give Google China more share of the voice around government officials," says Yu. There's a precedent: Rupert Murdoch's News Corp. (NWS) last year became partners with a Web site run by state-owned China Central Television. Such a deal, though, would trigger criticism of Google among Americans for dealing with the powers that be.